Elements That Affect Mortgage Rates

There are many factors that influence mortgage rates such as inflation, economic growth and most importantly the Federal Reserve. When determining mortgage rates, the Federal Reserve’s monetary policy is taken into consideration.

The Federal Reserve’s monetary policy is set by the Federal Open Market Committee. The Federal Reserve itself is the central banking system of the United States of America. The goal of the Fed is to boost job growth while controlling the amount of inflation. The Federal Open Market Committee

(FOMC) has a certain way of maintaining its goal through monetary policy. This is done through the federal fund rates. The federal fund rates are “interest rate that banks charge one another for short-term loans.” These federal fund rates help shape mortgage rates along with other long-term loans.

Neither the mortgage rates or the fed rates follow each other necessarily. Most of the time, the federal funds rate and mortgage rates tend to go the same direction. There are times in history when the Fed has  lead the market and other times the mortgage market has lead.

The FOMC meets eight times a year to work on any necessary changes that might need to be made to the monetary policy. If they make a change, FOMC will let investors know the result of their decision before making the change. This way there will be a consensus derived from the investor’s opinion on the FOMC’s decision. The consensus, for the most part, agrees with the Fed’s decision whether to cut rates, raise them or keep them the same.

Currently, the federal funds rate has been reduced to a range of 0% to 0.25% as of March 15, 2020.

The central bank plans to keep the federal funds rate close to zero for the time being. They also will conduct a round of quantitative easing which is a form of economic stimulus the central bank has used in the past.

The quantitative easing planned is for the Feds to purchase around $500 billion of Treasurys and approximately $200 billion of mortgage-backed securities. The Fed hopes this will “add cash to the mortgage banking system to reassure lenders that it’s safe to lend because the Fed is willing to buy the resulting mortgage-backed securities.”

Federal funds rate will not only influence the mortgage rates in the housing market but will also influence the home equity lines of credit (HELOC). The HELOc rates are usually adjustable rates and are based off the Wall Street Journal’s prime rate. In a nutshell, when the Fed cuts the federal funds rate, the interest rate on HELOcs will also go down.


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Fed Supports A Smooth Market

The Federal Reserve will address the strains in the market for Treasury securities and agency mortgage-backed securities. The Fed wants to ensure a positive flow of credit to residents and businesses throughout the country.

During their announcement, they revealed they would “purchase at least $500 billion of Treasury securities and at least $200 billion of mortgage-backed securities.” The Feds also proposed an

establishment of a Main Street Business Lending Program that will support lending to qualifying small and medium-sized businesses.

“The Fed’s action represents an open-ended and unlimited expansion of quantitative easing to control interest rates,” said NAHB Chief Economist Robert Dietz. “The central bank’s role of lender of last resort has been expanded to be buyer of last resort in order to support liquidity and the operation of financial markets. The Fed clearly intends to use its full powers to support the economy during an extremely disruptive phase.”

During this time, the central bank will take many steps to see this plan to fruition. They will establish new programs that will support the flow of credit to consumers, employers and businesses in the US. They will provide $300 billion in new financing and the Department of the Treasury will use the Exchange Stabilization Fund (ESF) to provide $30 billion.

There will be three facilities in total. They will create the Primary Market Corporate Credit Facility (PMCCF) which will support new bond and loan issuance. The Secondary Market Corporate Credit Facility (SMCCF) will supply liquidity for outstanding corporate bonds. The third will be called the Term Asset-Backed Securities Loan Facility (TALF) which will support the flow of credit to consumers and businesses. This third facility will issue ABS (asset-backed securities) that are supported by student loans, auto loans, credit card loans, SBA (Small Business Administration and other established assets.

“The Federal Reserve is committed to use its full range of tools to support the U.S. economy in this challenging time and thereby promote its maximum employment and price stability goals,” as stated in a press statement on the Federal Reserve website.

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A Strong February for Single-Family Starts

Single-family starts grew in numbers this February according to estimates from the Housing and Urban Development and Commerce Departments. The great start stems from builder confidence and low mortgage rates.

The Federal Reserve rolled out an emergency rate cut making rates hit a historic low. Currently, the benchmark interest rate range is 1% to 1.25%. Freddi Mac reports an average 3.45% for a 30-year fixed-rate mortgage and 2.95% average for a 15-year fixed-rate mortgage. What does this mean for

the housing market? Potential buyers who are just on the verge of purchasing a new home will now have a great incentive to jump on the opportunity.

The Single-Family Housing Starts and Builder Confidence is shown in a graph depicting the 3-month moving average. According to the graph, the 3-month average for single-family construction is higher than post-recession high. The single-family starts showed an increase of 6.7% making it a 1,072,000 seasonally adjusted annual pace in February.

Builder confidence is going strong with construction at a fast pace due to warmer weather. There were 539,000 single-family homes under construction reported in the month of February 2020. The numbers look as though they do not reflect a rise, however, they are making up for the declines seen in early 2019. Other sectors are also seeing an increase. Currently, there are 683,000 apartments under construction which is 12% up from this time last year. This also marks a post-Great Recession high for apartment construction.

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America’s Labor Market Still Going Strong

The US Labor Department’s Jobs report for February showed the American labor market remained strong. Reflected in the report showed that 273,000 jobs were added by the US economy. The US Bureau of Labor Statistics said this was substantially more than us economists had foreseen. In fact, the numbers resulted in the largest monthly increase since May 2018 which put the unemployment rate back to the historic low of 3.5%.

Among the job gains per industry, the leading gains of new jobs were in health care and social

assistance, food services and government. Within those industries, 7,000 people were hired for the April Census.

The Institute of Supply Management supplied data showing that the US manufacturing sector has been growing the past five months. The ISM report is just another factor indicating that the US economy is in a good place.

“With global growth stabilizing in recent months and domestic economic activity also starting to pick up, the ISM survey adds to the evidence that 2020 is likely to be a better year for US manufacturers,” wrote Capital Economics’ Senior US Economist Andrew Hunter in a note.

The year leading up to the February job survey paychecks rose by 3% with a 0.3% bump in February. The month’s report in addition to better-than-expected services PMI from the Institute for Supply Management was a plus for the US economy according to Michael Hanson, SVP of research at Fisher Investments.

This is just icing on top of the January report which beat expectations. The Labor Department’s Jobs report found that the US economy added 225,000 jobs with an unemployment rate of 3.6%. Job growth was seen in the construction, health care, transportation and warehousing industries.

According to Capital Economics Chief US Economist Paul Ashworth, mild weather in January boost the construction and transportation sectors.


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Mortgage Rates at a New All-Time Low

Mortgage rates have been at record lows for a while now, but with a new emergency rate cut from Federal Reserve rates are at historic lows. Now is the time to refinance or buy a home with the half percentage point cut by the Fed this week which puts the benchmark interest rate range at 1% to 1.25%.

“It’s definitely a good time for someone looking to buy a home to get financing,” said Mark Hamrick, senior economic analyst for Bankrate.

Hamrick believes that rates will still go lower. According to Freddi Mac, last weeks are at an average

3.45% for a 30-year fixed-rate mortgage and 2.95% for a 15-year fixed-rate mortgage.

“If you’re trying to look for the silver lining in the midst of the current climate,” said Hamrick, “the mortgage interest rate is close to the top of the list.”

The spring market is looking up with the help of the rate cuts. Those that are on the cusp of purchasing a new home might move a step quicker with the favorable rates. The entire real estate sector, not just individual buyers will benefit.

“Hesitant home buyers will be enticed to take advantage of low-interest rates,” said Lawrence Yun, chief economist at the National Association of Realtors, in a statement.

As mentioned earlier, rates will drop even more but should home-buyers wait for lower rates? Those that are in the market to refinance or secure a new mortgage need to weigh the benefits. According to Mike Hennessy, a certified financial planner with Harbor Crest Wealth Advisors in Fort Lauderdale, “if you can meaningfully save on your interest costs, build equity quicker, or extract equity at a reasonable cost to fund a renovation project, then take the bird in hand today.”

Run the numbers to see if it would be beneficial to refinance. Comparing your current rate with the rate that is being offered on a mortgage refinance will help answer your question.

“If the new rate is 75 basis points (0.75%) lower than the current rate, that it’s generally going to be worth it to refinance after the costs of the refi,” said Cynthia Meyer, a certified financial planner with Real Life Planning in New Jersey.

“If you’re planning to stay in your home, run the numbers to see if it makes sense to refi from a 30- to a 15-year mortgage as well,” she said. “You may be able to pay around the same amount every month and get your house paid off a lot sooner, with lower total interest costs.”

Even with the historic low rates, always shop around. Lenders offer competitive rates and some will include closing cost.

“You shouldn’t assume you’re going to get a good deal from a big bank just because you have your checking and saving account with them,” Danielle Seurkamp, a certified financial planner with Well Spent Wealth Planning in Cincinnati, Ohio said. “Often the smaller, community banks offer the best deals.”


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How Often People Move Can Impact the Housing Market

Just like any other consumer product the more something is in demand the better the market for it. The housing industry is no exception to the rule. Everyone needs a place to live so this, in turn, affects every aspect of the housing market from real estate to lending to title. The data collected

regarding if and when people are moving can interpret if the housing market is thriving.

There are a variety of sources and people interpreting the data collected. This can hinder a potential home buyer’s research when it comes to the housing market. There are many “spin doctors” who want to influence the public and might be steering them in the wrong direction. When it comes to research, there are many ways to discern what is fact and what is fiction.

Go to the facts, remember for the most part numbers don’t lie. The Census Bureau is a great neutral source. The Census Bureau is supervised by the Economics and Statistics Administration within the Department of Commerce.

The history behind the Census Bureau is interesting within itself. Founded in 1790 when Secretary of

State Thomas Jefferson appointed U.S. marshals throughout the country to collect data on the 3.9 million residents. For the next 150 years, the six question census added many categories that included manufacturing, agricultural, mining, fisheries, native language and others. In 1940, data on housing was added (other than the names of those living in households) and the real estate industry began using the data to predict the health of the housing market.

The homeownership rate is an important statistic to focus on as a baseline to research. An interesting fact according to the census, is that the homeownership rate has held steadily for approximately 60 years. According to housingwire.com, the ” rate is calculated on the proportion of households that are owner-occupied and has continuously held strong in the 60-70% range throughout the years.”

Throughout the years the highest at 70% was in 2005 and the lowest at 62% was during the recession.
Statistics in migration patterns show that 43% of people move due to housing-related issues, 27% move because of family-related issues, 18.5% move because of employment issues and 10.6% move for other various reasons. The Southern Region of the country has seen the largest migration pattern.

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NAHB’s Analysis Shows Gain in Custom Home Building for 2019

Low Mortgage interest rates have supported a surge in custom home building in the fourth quarter of 2019. The NAHB’s analysis of Census Data from the Quarterly Starts and Completions by Purpose and Design survey revealed that custom home building increased at the end of 2019.

The US Census Bureau’s Survey of Construction (SOC) is a survey conducted by the US Census Bureau and partially funded by HUD (Department of Housing and Urban Development). The SOC reports up to date national and regional data on housing starts, completions and characteristics of all residential housing. The data which is collected includes the start date, completion date, sales date, sales price (single-family houses only), and physical characteristics of each housing unit, such as

square footage and number of bedrooms. The Quarterly Starts and Completions by Purpose and Design is based on the Building Permits Survey and from the Survey of Construction (SOC).

The National Association of Home Builder’s analysis shows 44,000 total custom building starts during the fourth quarter of 2019. This is a 16% gain over the same quarter in 2018 which totaled to 38,000 total custom building starts. Data shows a solid gain occurred during the last four quarters with custom housing starts totaling to 177,000.

The custom home building market will continue to expand with demand from both owner and contractor built homes. The low mortgage interest rates will protect the custom home building market thus maintaining the positive custom home building outlook.

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